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TMI Blog2018 (7) TMI 353X X X X Extracts X X X X X X X X Extracts X X X X ..... mbai [ in short CIT(A) ] and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the Act ). 2. The ground of appeal filed by the assessee reads as under: The Ld. CIT(A)-33 erred in confirming the disallowance of ₹ 26,04,585/- on account of PMS Fees under the Head of Capital Gains of ₹ 97,87,309/-on sale of shares. 3. Briefly stated, the facts of the case are that the assessee/appellant filed his return of income for the assessment year (AY) 2010-11 on 29.07.2010 declaring total income of ₹ 1,05,92,370/-. The assessee, a partner in M/s Goldfield Mercantile Company, derived income by way of capital gains on sale of shares and mutual funds and also received interest income from Bank and other parties. During the course of assessment proceedings, the Assessing Officer (AO) found that the assessee had earned capital gains amounting to ₹ 97,87,309/- on sale of shares under a Portfolio Management Scheme (PMS) with Surefin Consultants Pvt. Ltd. on sale of shares against which he had paid consultancy and operating expenses of ₹ 46,93,398/- to SCPL. Also out of total expenses of ₹ 46,93,398/-, the assessee had claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to a return based fee calculated @ 20% per annum of the profits in excess of 15% of the profits after deducting all the expenses. The sum and substance of the AR s submission was that such fees paid by the assessee has direct relation with the income arising from the transfer of shares. 4.1 The Ld. CIT(A), thereby following the decision in Homi K. Bhabha (supra) and Devendra Kothari (supra), confirmed the order of the AO disallowing the claim of the assessee of ₹ 26,04,585/- on account of PMS fees paid against capital gains. 5. Before us, the Ld. counsel of the assessee submits that the issue is covered in favour of the assessee by the judgment dated 04.05.2017 of the Hon ble Gujarat High Court in Principle CIT v. Sintex Industries Ltd. (TA No. 291 of 2017). It is stated by him that in the aforesaid case, the Hon ble High Court has held that when the assessee incurred expenses towards consultancy charges in order to make investment, the AO was not justified in treating and considering the expenses incurred towards consultancy charges as capital expenditure disallowable u/s 37 of the Act. Reliance is also placed by him on the order of the Pune Bench of the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, we do not see any error in the order of the learned CIT [A]. This ground of appeal is rejected. In appeal by the revenue, the Hon ble High Court agreed with the order of the Tribunal deleting the disallowance of ₹ 24,37,500/- incurred by the assessee towards consultancy charges. We find that the case of the assessee in the instant appeal is distinguishable from the above decision in view of the fact that the issue therein was whether the AO was justified in treating and considering the expenses incurred towards consultancy charges as capital expenditure disallowable u/s 37 of the Act, whereas the issue herein is whether the AO is right in disallowing the assessee s claim on account of PMS fees against capital gains. 7.1 The Ld. counsel has placed reliance on the decision of ITAT, Pune in KRA Holding and Trading (P.) Ltd. (supra) which has been distinguished by ITAT, Mumbai in the case of Pradeep Kumar Harlalka (supra) as under:- 13. Coming to the decision of Pune Bench of the Tribunal in the case of KRA Holding Trading (P.) Ltd. (supra), after perusing the judgment very carefully we find that in that decision the decision of co-ordinate Bench of M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the head 'capital gains' and this position was not in dispute. The only dispute was whether the fees paid by the assessee for PMS could be allowed as deduction in computing such income or not. The charge of income-tax is created by virtue of the provisions contained in section 4 according to which the income-tax is charged for the relevant assessment year in accordance with and subject to the provisions of Act in respect of the total income of the relevant previous year of every person. As per the scheme of the Act, income is broadly classified under five different heads and the income chargeable to tax under these heads has to be computed as per the relevant provisions applicable to respective heads of income. Section 45 to section 55A falling under Chapter IV-E deal with assessment of income under the head 'capital gains' and section 48 in particular prescribes the mode of computation of capital gains. As provided in section 48, expenditure incurred wholly and exclusively in connection with transfer and the cost of acquisition of the asset and cost of any improvement thereto are deductible from the full value of the consideration received or accruing to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is regard, it can be said that even though the assessee was under an obligation to pay the fees for PMS, the mere existence of such obligation to pay the said amount was not enough for the application of the rule of diversion of income by an overriding title. The true test for applicability of the said rule is whether such obligation is in the nature of a charge on source, i.e., the profit earning apparatus itself and only in such cases where the source of earning income is charged by an overriding title, the same can be considered as diversion of income by an overriding title. [Para 15] In the instant case, the profit arising from the sale of shares was received by the assessee directly which constituted its income at the point when it reached or accrued to the assessee. The fee for PMS on the other hand was paid separately by the assessee to discharge his contractual liability. It was thus a case of an obligation to apply income which had accrued or arisen to the assessee and the same amounted to a mere application of income. Therefore, it was to be held that the payment of fees by the assessee for PMS did not amount to diversion of income by overriding title and the conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the assessee's submissions. He echoed the assessment order on this point by holding that such charges could not be allowed as deduction u/s 48. On second appeal, the Tribunal observed that same issue had been predominantly decided in Devendra Motilal Kothari (supra) and Pradeep Kumar Harlalka (supra) against assessee after making thorough analysis of issue and, dealing with all aspects now raised by assessee and therefore, it thought as not proper to revisit all relevant facts and legal position in the above case with a view to test the correctness of above orders. On that reasons, the Tribunal sustained the disallowance made by the AO. 7.4 In Capt. Avinash Chander Batra v. DCIT (2016) 68 taxmann.com 366 (Mumbai-Trib), it has been held that PMS fee paid by assessee to various portfolio managers could not be allowed as deduction while computing capital gain arising from sale of shares kept in portfolio management services accounts held with various funds. 7.5 The Hon ble Bombay High Court has held in Panjumal Hassomal Advani v. Harpal Singh Abnashi Singh Sawhney, AIR 1975 Bom 120 that a Co-ordinate Bench cannot refuse to follow an earlier decision on the ground that it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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